Applied Materials Posts a Solid Quarter, but China Drag and AI Valuation Fears Hit the Stock

Applied Materials entered this earnings season at an awkward moment for the entire semiconductor complex. The AI trade is unwinding, semicap valuations are being questioned, and investors who spent the last 18 months chasing every AI-adjacent theme are suddenly remembering gravity exists. Against that backdrop, AMAT posted a modest beat on revenue and EPS—but it’s not earning any style points this morning. Shares are trading lower by roughly 6% in early action, slicing beneath the 50-day moving average at $213 as sellers lean into the idea that the industry may have to survive a digestion period before the next up-cycle kicks in.

The quarter itself was objectively fine. Applied reported adjusted EPS of $2.17 versus expectations of $2.12, on revenue of $6.80 billion versus the $6.66 billion consensus. Adjusted operating margins of 28.6% were healthy, and the company delivered record annual revenue, gross margin dollars, operating profit, and EPS. Fiscal 2025 marked the sixth straight year of growth. At the headline level, this is a management team that continues to execute, even with geopolitical headwinds blowing directly in its face.

But in a market that has shifted from euphoria to valuation audits in a matter of weeks, “fine” isn’t enough—especially when the details reveal softness beneath the hood. Quarterly revenue fell 3% year over year, operating income dipped around 6%, and EPS also slipped. The strength in DRAM—fueled by rising HBM demand and surging DRAM pricing—was offset by declines in China and foundry/logic. Analysts were quick to note that the company managed the quarter well, but execution alone doesn’t solve a tougher macro mix.

The China Problem Is Getting Louder If investors are looking for the source of AMAT’s recent underperformance—and the reason why analysts are cautious despite record annual metrics—they can circle one line item: China. Once nearly 40% of global wafer fab equipment spending, China now represents just 25% of Applied’s revenue, down from 28% in fiscal 2025 and set to fall further in the year ahead. CFO Brice Hill was blunt about it: the company expects China wafer fab spending to remain lower and doesn’t assume any change in export restrictions.

Trade restrictions cut off access to more than 20% of the China market in fiscal 2025—double the impact seen in fiscal 2024. Even with China temporarily benefiting from relaxed DRAM export rules, the overall direction is negative. Domestic Chinese competitors are replacing U.S. tools where possible, and the U.S. restrictions still prevent Applied from shipping some of its most advanced systems. This remains the biggest structural headwind for the stock, and the primary reason China growth will not be the lever it once was.

The Drivers Beneath the Quarter: DRAM, HBM, and Pricing Strategy While China slipped, DRAM was a bright spot. Revenue from leading-edge DRAM customers grew more than 50% over the last four quarters, a nod to the blistering demand for high-bandwidth memory powering everything from Blackwell to MI350. Surging DRAM prices are providing a tailwind, and AMAT holds leading share in key DRAM and advanced packaging technologies that will remain essential for future AI compute cycles.

Pricing also helped the quarter. AMAT shipped a richer mix of advanced systems and raised prices broadly, which more than offset cost increases and supported elevated gross margins. But pricing power only goes so far. The semiconductor systems division saw margins decline from 36% to 32%, illustrating that mix and geographic shifts are outweighing pricing improvements.

Guidance: Solid, but Not Enough to Satisfy a Nervous Market For fiscal Q1, AMAT guided revenue to $6.35–$7.35 billion versus the Street at $6.76 billion, and EPS to $1.98–$2.38 versus the $2.13 consensus. It’s a touch ahead—but not “AI bubble ahead.” Management reaffirmed its view that 2026 will be another growth year, heavily weighted to the second half, as major customers prepare for capacity ramps tied to next-gen AI systems, gate-all-around architectures, backside power, and HBM4.

Analysts broadly agree that the big uplift is coming—but not soon enough to help a market currently allergic to any ambiguity. JPMorgan, Stifel, and Cantor all reiterated bullish long-term views but emphasized near-term mix headwinds, a China drag, and the fact that the WFE (wafer fab equipment) spending cycle doesn’t turn sharply in AMAT’s favor until the second half of calendar 2026.

What It Means for the Semicap Landscape The setup is the same across semicap names: great long-term structural drivers, middling near-term demand, and an AI investment boom that has temporarily outpaced real tool shipments. AMAT isn’t alone—LRCX, KLAC, and ASML are navigating similar cross-currents. But AMAT carries the added complexity of higher historical China exposure, making it slightly more vulnerable to the current macro landscape.

Still, the long-term story is intact. AI infrastructure demand, advanced packaging growth, and next-generation logic transitions all favor AMAT. The question now is simply whether sentiment stabilizes before fundamentals reaccelerate. With the stock back below the 50-day, the technicals suggest investors have decided to wait for clearer skies.

If AMAT’s outlook is right, those skies arrive in late 2026. For now, the turbulence continues.